Fed Gives Economy A Half-point Nudge In Time For Holidays

In a bold move geared to ignite a lackluster economy, the Federal Reserve Board slashed its benchmark interest rate by a half-point Wednesday.

It was the first rate cut of the year, after 11 such moves in 2001, and brought the federal funds rate to 1.25 percent -- the lowest in four decades. The funds rate is the interest banks charge each other on overnight loans.

The Federal Reserve's Open Markets Committee, which voted unanimously, 12-0, on the move, assured investors in a statement that the cut would help the economy through "this current soft spot."

The size of Wednesday's cut surprised many economists, who had expected only a quarter-point cut. But they added that even the bigger cut may not have a meaningful impact, particularly on consumer spending, which is two-thirds of the nation's economy.

"This is 110 percent psychological," said Anthony Chan, the chief economist with Banc One Investment Advisors in Ohio. "The purpose is to say they are minding the store and taking care of business."

Chan, who nonetheless called the larger cut "masterful and artful," said any "real impact" on the economy might not come for another nine to 12 months.

But some economists, such as Scott Brown, of Raymond James & Associates, speculate that "the Fed knows something the rest of us don't" about potential credit problems in the financial sector.

Both stocks and Treasury bonds rose Wednesday, with the Dow Jones Industrial Average rising 93 points to 8,771.01 and the NASDAQ exchange gaining almost 18 points, closing at 1,418.99.

Policy-makers hope the move will encourage consumers to open their pocketbooks during the holiday season. But economists aren't so sure.

"The Fed wants to make sure this is a green Christmas, not a blue Christmas," said Hofstra University Weller economics professor Irwin Kellner. "But consumer confidence is being affected by a lot of factors beyond the Fed's purview."

Kellner noted that the nation's flat employment picture is hurting the overall economy -- and that won't be helped much by the Fed's move.

The rate cut particularly hurts savers, as passbook accounts, money markets and certificates of deposit will earn even less interest in an already low-rate environment.

"Those that are dependent on interest income are continuing to get squeezed," Bankrate.com financial analyst Gregory McBride said, noting that it especially affects seniors.

But investors in fixed-income instruments will benefit, as bond prices rise, according to Varun Mehta, the director of fixed income at Mason Street Advisors in Wisconsin.

In the portion of its statement that deals with future actions, the Fed said it believed the risks to the economy were balanced between inflation and slower growth, leading observers to think that rates may have hit bottom.

Randi F. Marshall is a writer for Newsday, a Tribune Publishing newspaper.